Brent crude surpasses $50 a barrel for first time this year

May 30, 2016 12:00 AM

Oil prices crossed 50 a barrel for the first time in 2016 as supply disruptions; falling inventories and increased global demand continue to fuel a recovery. Brent crude hit 50.22 per barrel at one stage on Thursday, its highest level since early November.

The surge followed US data showing that oil inventories had fallen after supply disruptions due to fires in Canada that reduced supplies by about a million barrels per day. Outages in Venezuela, and unrest affecting energy infrastructure in Nigeria have also caused supply disruptions.

US crude oil inventories fell by 4.2 million barrels to 537.1 million barrels in the week to May 20, according to US Department of Energy data. Talks in recent months between Opec and Russia about freezing oil production are also another factor spurring a price rise.

At 0715 GMT, the European benchmark Brent was up 34 cents at 50.08 a barrel, while US benchmark West Texas Intermediate was not far behind, trading 28 cents higher at 49.84. Brent has now risen 80 per cent since it hit 13-year lows of around 27 in early 2016 amid concerns of a global oversupply and disruption in the world markets.

For oil exporters in the GCC, who faced up to 300 billion annual revenue shortfall in the wake of prices plummeting by 70 per cent over the past months, the dramatic surge came as Qatari energy minister Mohammed bin Saleh Al Sada, who is also head of the Organisation of Petroleum Exporting Countries, argued that a minimum price of 65 a barrel for oil is "badly needed at the moment."

However, analysts have cautioned that price volatility was likely to continue, saying it too early to believe this surge to be the beginning of the critical rebound. "If the market goes up too quickly there will be auto-corrections," they warned.

The two-year steep drop in oil prices sets the stage for the next meeting of the Opec in Vienna on June 2.

Goldman Sachs has said that it now expected oil prices to consistently hit 50 a barrel in the second half of 2016 and 60 by the end of 2017. However, analysts in the "bear" camp reckon there is still plenty of global supply that could potentially come on line, with a number of US producers of shale oil ready to step up production as prices rise. The return of thousands of barrels of crude onto global markets from Iran is also helping keep oil plentiful.

Oil experts said prices are likely to be kept in check by the fact that there remain large volumes of supply ready to return to the market. For one thing, the recent outages among exporters are likely to be temporary.

However, oil experts believe that if oil remains above 50 some producers might be spurred to increase supplies, threatening to cap further price gains. Pioneer Natural Resources, an independent producer, said last month that it would add drilling rigs if the price of WTI in 2017 was above 50 and inventories were declining. "The return of US oil production on the back of higher oil prices, cost deflation across the sector, and Saudi Arabia's intentions to raise crude production and exports are headwinds to a price rally," said Citi.

Traders are also wary of the rally petering out once refiners have bought the crude they need to feed the coming US driving season. In early 2015, oil prices similarly rallied from January to May before collapsing again.

Oil companies have started preparing for higher prices in a sign of growing confidence. BP said last month it had budgeted for prices of at least between 50 and 55 a barrel in 2017 while US oil producer Pioneer Natural Resources announced plans to add up to 10 new rigs when the oil price gets back up to 50.

According to Citigroup, 50 oil may prompt the activation of many wells in the US while prices at 60 are likely to spur fresh drilling. The recent price rally could release 400,000 barrels a day or more of new U.S. output. The bank's analysts forecast oil prices could reach around 65 a barrel by the end of 2017.